Hello, friends! It’s Richard, founder of Short-Term Rental University and Airbnb super host. Today I want to talk to you a little bit about what I look at before I make a real estate transaction. I think this might be helpful for some of you that are either getting started or looking to expand. If you don’t know what other people look at then are you doing too much or too little?
The first thing I want to talk to you about has absolutely nothing to do with real estate but we will circle back to real estate. In the world of finance, which is where I started my career, there are two types of people; equity people (Really like stories. They like to understand what Elon Musk is doing for Tesla) and fixed income or bond people. The fixed income people are all about crunching numbers. everything must tie out mathematically, they don’t really care about the story. In fact, they don’t even want to know the story. They just want to do the math. These are two different camps of people very smart people and it’s just a personality difference.
The question to start with is, “What kind of person are you, are you a really quantitative person (Math) or are you more qualitative (Story)?”
It’s important to know that because if you’re really into storytelling you’re just never going to be very good at the quantitative and vice-versa. Try and figure out what you care about and how you make decisions.
Let’s talk a little bit about me. When I was at Wharton Business School, the highest brain power people and the most prestigious jobs were all fixed income. It was like rocket science, math, and finance. Everybody sort of wanted to do fixed income, myself included, and I ended up doing some derivatives, options trading, and so on. After this, I realized that at the end of the day I’m much more of a qualitative and storytelling kind of guy.
In fact, I’ve never owned a single bond. I don’t like bonds, I haven’t like bonds, I don’t think I’ll ever like bonds, but I love equities. For real estate, I started off trying to be very methodical and quantitative. During my very first few real estate investments I really crunched all the numbers, looked online and applied tons of spreadsheets, I tried different calculators, and I tried to make the decision based on what the numbers told me. Now, because I’m not that guy I didn’t really care that much no matter what the numbers told me. What I really wanted to do was formulate a thesis.
Why this property?
Why this location?
Why this market?
What do I think is going to happen?
That’s just the way my mind works. So my progression had been from purely quantitative looking at the numbers and trying to make decisions and deals to much more into the qualitative. I’m not saying that that’s the right way for you to do it, but I’m just giving you an example of how I did it.
Today, when I look at real estate transactions, it’s all about the story. Now I do still check the numbers and I make sure that they make sense, but I do it really quickly.
How much is the monthly payment?
What are the taxes?
What are the costs to carry?
What do I think I’ll make?
How many nights, at what price point, and what seasonality?
I can do that really quickly and as long as I get within the ballpark, meaning like it’s not a huge negative number, then I just take a look at the risk assessment.
How much do I like it?
How much do I believe in the future growth and appreciation of the property?
That solves a lot of things. Then there’s additional flexibility in the way of tax deferrals and tax incentives in investing in short-term rental properties and that’s just gravy! That’s like the cherry on top.
Here’s the takeaway. The most important thing that you can get from this article is to figure out what kind of decision-maker you are and how you make decisions. When they’re really big and filled with risk. Buying real estate could be one of the most expensive investments that you’ve ever made so I can understand the anxiety, the double checking, the triple checking, maybe even panic.
I’m here to assure you that it’s really not necessary and you don’t have to over complicate it.
We as humans we tend to try and make really big important decisions really complex. We spend a lot of time struggling and wrestling and it’s not necessary. Minimize the decision-making but instead, try and find a way that you can make it so you’re comfortable. The main thing here is to get started and to take action. Whether you’re expanding, growing or just getting your feet wet don’t get paralyzed because you don’t have all the answers.
There is risk, you can’t have all the answers. No model, no fixed income, no rocket scientist, nobody can tell you what the outcome is. You have to take the risk so just get started.
I know this is going to sound really minimalist, and people are going to think like it’s nonsense. How can you buy so much property that way? I’ve been doing it for decades, I have a gut feeling. I want to encourage you to start to do that same sort of process for your own passion. Do not get slowed up either!
Go ahead and leave a comment below, tell me what you look at. What metrics, what your gut feel? Whatever you share with us, I’d really appreciate that! Most importantly please like the video and article and subscribe if you haven’t already.
Have a great day and happy hosting!
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